“There is some chance that an alternative, weak-growth scenario could be emerging,” she said. To justify a cut, Mester added that she would would want to see “a few weak job reports, further declines in manufacturing activity, indicators pointing to weaker business investment and consumption, and declines in readings of longer-term inflation expectations.”
But that is not what she expects.
“The most likely outcome continues to be that the economy will maintain its good performance in 2019,” she said.
Mester compared recent months to a soft patch the U.S. economy weathered in 2016, when the Fed backed off from a forecast of four rate hikes for that year after lifting rates in December 2015. The Fed ultimately waited out that stretch and resumed increases in December 2016.
Low Inflation
“So long as the sustainable-growth scenario of continued expansion and strong labor markets remains the baseline outlook, I would favor taking a similar opportunistic approach,” she said.
She also pushed back against the idea, advanced recently by Minneapolis Fed President Neel Kashkari, that low inflation alone could justify a cut.
“If it is the case that non-monetary structural factors are holding back measured inflation, thereby putting downward pressure on inflation expectations, rather than an aggregate demand problem, it is not clear how effective this policy would be,” she said.
The Fed’s favored gauge of inflation remained well below target, at 1.5%, in the 12 months through May. More worrying, measures of expectations for the future level of inflation have slipped recently, both in market- and survey-based metrics.
Price Pressures